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Superannuation
Update and
The Share
Market - Where
to from here?
February 2008
Disclaimer
This presentation (and any private discussions with the presenter) is not personal
securities advice and does not take into account any person's investment objectives,
financial situation or particular needs. Before making an investment decision you
need to consider, whether any investment is appropriate in light of your particular
investment needs, objectives and financial circumstances and you should consider
obtaining expert financial, legal and taxation advice. This presentation does not
constitute taxation advice.
Information and opinions presented in this report have been obtained or derived from
sources believed by Wilson HTM Ltd to be reliable, but Wilson HTM Ltd makes no
representation as to their accuracy or completeness. Past performance should not be
taken as an indication or guarantee of future performance. The price, value of and
income from financial products may fluctuate and any product may become
worthless.
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Wilson HTM Investment Group
Company Name and ASX Ticker
Wilson HTM Investment Group – WIG
History
1895 – over 110 years of experience in investment
 Aim to achieve out-performance through:
 Concentrated portfolios
Philosophy
 Specialisation in mid cap stocks and direct investments
 Access to quality IPO’s and corporate deals in equities and fixed
interest
Investment management for private clients & institutions
Focus on Self Managed Superannuation
Overview
Active corporate finance team
Relationship with Deutsche Bank (19.9% shareholder)
Queensland based business
10 offices and over 300 staff
Market Cap
$272m @ $2.85 share price
Share price performance
43% return since listing in June 07
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Superannuation:
Further Change
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Contribution Limits

Removal of Reasonable Benefit Limits (RBL’s)

Limits on concessional contributions



$100,000 per annum (FY 2012)
$50,000 per annum
Limits on non-concessional contributions


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Over 50:
Under 50:
$150,000 per annum
$450,000 over three years

Effective penalty tax rate of 46.5% - 93.0%

Government Co-Contribution
Withdrawals

Removal of compulsory cashing rules

Under 60 – same rules apply.

Over 60
 Tax free pensions
 Tax free lump sums

Application of preservation rules

Transition to retirement pension
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Pensions
$100,000
Employment
$92,000
$8,000
Individual
Super Fund
$42,780
$1,250
Tax Man
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Pensions
$100,000
Employment
$0
Individual
$100,000
$0
$15,000 ?
Tax Man
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Super Fund
$50,000
Borrowing inside super

Section 67 SIS Act
Prohibits borrowing (limited exceptions)

Reg 13.14 SIS Act
Prohibits super fund giving charge over asset

Section 71 (1) SIS Act
Defines related trusts as In-house Assets

Section 273 ITAA 1936
Special Income Provisions

Amendments made to SIS Act, to allow instalment warrants:


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Section 67 (4a)
Section 71 (8)
Allow borrowing (in specific circumstances)
Exemption to in-house asset rules
The basic structure
Lender
Limited
Recourse
Loan
Super Fund
Investment
Acquisition
through
instalment(s)
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5 Basic Conditions

The lender has limited recourse
against the super fund

The borrowed funds are used to
purchase an asset the super fund
could otherwise acquire

The asset is held on trust, so that
only the super fund has a beneficial
interest

The super fund can acquire the asset
by paying one or more instalments

The asset (or replacement asset)
must be the only asset held by the
trust
Trust
Property
Borrowing to Invest

Investment strategy must allow for:
 Borrowing to take place
 Specific asset to be purchased

Sole purpose test must be considered

In house asset rules should be considered

New legislation is wider than intended / necessary

Clearly not what was intended
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Australian Equity
Market
12 |
Another year of strong returns in 2007
13 |
What a Year!
S&P/ASX 200 Accumulation Index - 2007
AUD hits high –
US$0.93
Shanghai
composite up
50% for 2007
Fed drops
interest rates
Earnings growth and
strong economic
forecasts
Low CPI and
strong corporate
earnings
US
economic
fears
Superannuation
inflows - $1m each
Sub prime crisis begins
24%+ returns in
2006
Shanghai
correction
Source: IRESS, Wilson HTM
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Fed drops
interest rates
What of the Heavy Weights?
Resources
Energy
Financials ex prop
Listed Property
XKO
XKR
XXK
XEK
XPK
15 |
Source: IRESS, Wilson HTM
ASX 300
300 Resources
300 Financials ex Property Trusts
300 Energy
300 Property Trusts
Earnings growth may have downside risk
16 |
Similar sector performance again in 2007
17 |
Mining sector valuations have risen
18 |
US Economy and
its impact upon
Australia
19 |
US Sub Prime Crisis


Causes

Excessive lending to borrowers lacking the capacity to pay over the last 2-3 years

Repackaging debts into Collateralised Debt Obligations (CDO’s)

Selling CDO’s with inflated credit ratings
Effects

Write downs on CDO’s on hedge fund and investment bank balance sheets
 Write-downs exceed US$125Bn.
 Bond Insurers under pressure US $200Bn to restore AAA Credit Rating
 Poor housing market and falling property values
 Increased occurrence of defaults

Increased credit spreads due to risk aversion in credit markets
 Higher cost of borrowing
 Reduced corporate/private deal flow

20 |
Volatility on US stock market
US New housing starts -38.2% yoy growth following
rates of -25.0% for Nov and -13.3% for Oct.
Levels back to June 1991.
70%
2,500
USA
New Housing Starts
50%
seasonally adj
30%
1,500
10%
1,000
-10%
500
-30%
yr-on-yr%
000 units
-50%
-
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
Jan-02
Jan-01
Jan-00
Jan-99
Jan-98
Jan-97
Source: USA Bureau of Census, WilsonHTM
Jan-96
Jan-95
Jan-94
Jan-93
Jan-92
Jan-91
Jan-90
Jan-89
Jan-88
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Total (000 units)
Growth year-on-year (%)
2,000
US Industrial Production – slight improvement
however is a trailing indicator
10.0%
120
USA Industrial Production
8.0%
1997=100
110
6.0%
4.0%
2.0%
90
0.0%
80
-2.0%
70
-4.0%
60
IP Y-o-Y%
Industrial Production
-6.0%
-8.0%
50
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
Jan-02
Jan-01
Jan-00
Jan-99
Jan-98
Jan-97
Jan-96
Jan-95
Jan-94
Jan-93
Jan-92
Jan-91
Jan-90
Jan-89
Jan-88
Source: USA FRB, Wilson HTM
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US IP (2002 = 100)
IP Yr-on-Yr Growth
100
US Potential Housing Loan Defaults
Source: CBA
23 |
US Mortgage Rate Re-Sets
Source: CBA
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US Housing Balance Sheet
Source: CBA
25 |
US Employment
Source: CBA
26 |
US Consumer Confidence
Source: CBA
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What of China?
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What of China? – RIO have identified 4 themes
1. Rapid growth
2. Decoupling
3. Commodity intensive growth
4. Increasing domestic resource production costs
29 |
Rapid Growth - Chinese growth accelerated in 2007
Source: Global Insight
30 |
Growth Forecasts – China forecast to grow 10.5%
2008 and 9% in medium term
GDP Growth - Asian Tiger Economies
Country
Time Span
Duration
GDP Growth p.a.
China
1978 -2003
25 yrs
6.10%
Japan
1950 - 1973
23 yrs
8.20%
Korea
1962 - 1990
38 yrs
7.60%
Taiwan
1958 - 1987
31yrs
7.10%
Source: Financial Times
31 |
Increasing FX reserves provide buffer against
external shocks
Source: State Administration of Foreign Exchange
32 |
Decoupling - Direct trade effects from a US slow
down are anticipated to be small
Source: Centre for International Studies
33 |
Commodity Intensive Growth - Rapid
Industralisation/Urbanisation = China as the world’s
largest consumer of commodities
Source: WBMS, Barlow Jonker,IEA, PB
34 |
Key targets for China’s economic & social
development - The 11th 5 year plan
Source: Chinese government and provincial levels 5 year plans 2006 to 2010
35 |
Increasing Domestic Resource Production Costs Chinese currency likely to strengthen further
(increasing long term commodity prices)
Source: Centre for International Economics
36 |
Strong demand from economic and demographic
development favours major base metals
Sources: Global Insight – for population distribution, RIO Tinto for commodity expenditure profiles
37 |
China – Is it really that good?

Ernst and Young conducted a study of the Non Performing Loans in China in 2006




The big 4 banks (which control approx. 70% of financial assets) US$358Bn
“Official” figures for China’s NPL’s = US$150Bn for the big 4 banks
Total financial system US$911Bn = 40% of GDP
In 2005 comparative numbers in the region where:
 India’s NPL 5% GDP
 Indonesia NPL < 5% GDP and
 Japan NPL < 3% GDP.

S + P and Fitch estimates are US$320 to 330Bn
Source: Financial Times
38 |
Where to from
here?
39 |
World Economic Growth
40 |
Market valuation had been above average
41 |
Sector PE ratings vary across industrials
42 |
Sectors have re-rated others have de-rated
43 |
Aust Housing Loan Arrears
44 |
Repricing of Default Risk
Source: Bloomberg
45 |
The Way Forward - Summary



46 |
US Economy

Affects of credit crisis likely to take several months to un-wind

Asset de-valuation likely to be more wide spread than residential real estate

Government cutting rates short term to stimulate the econ

US slowdown expected to continue?

Medium to long term possible export lead recovery

Watch inflation pressures
Chinese industrialisation

Growth likely to remain above 8-9%pa for medium term

US slowdown exp to reduce growth by circa 1%?

Demand and pricing of commodities likely to remain high
Australia

Fundamentals of economy intact

Volatility likely to remain (opportunities?)

Focus on fundamentals CF, Margins, Dividends and strong management

PE compression expected to consolidate

Concern over emerging inflation i.e. wages growth??